Why developers cannot afford to build affordable houses

Imagine you were offered a job with a salary which was insufficient to cover all your basic expenses like food, childcare, petrol and mortgage. Would you take the offer?

I believe the immediate response to the question would unanimously be “No!” More so when the cost of living is increasing rapidly over time. One would rather take more time and effort to look for a job that can actually make ends meet.

Now imagine an almost similar question being asked on the current supply of affordable housing.

When private developers are unable to cover the cost of the land and construction, would they be able to develop affordable homes?

Just like the cost of living, the idea of building affordable homes is not further helped by the increasing land and construction costs. Dwindling availability of development land in urban and semi-urban areas has increased land cost. As for construction cost, it is not only affected by inflation but by the increase in raw-material costs.

With these challenges, it is not surprising that the supply of affordable housing is not meeting its demand. Many small developers who used to collectively contribute significantly in these areas had now disappeared from the development scene.

According to the McKinsey Global Institute (MGI), the business and economic research arm of McKinsey & Company, 330 million households around the world today lack decent housing or are financially stretched with their housing loans that they forgo other basic needs. This figure illustrates the point that both developing and advanced economies faced the same challenges of providing low cost affordable homes to their people.

In its report “A blueprint for addressing the global affordable housing challenge”, MGI identified four approaches that can narrow the housing gap in different nations. They are:

• Securing land for affordable housing at the right location;
• Developing and building homes at lower cost;
• Operating and maintaining properties more efficiently; and
• Improving access to financing.

Of the four approaches, the most important approach for our country is to unlock land supply for affordable housing. Land is usually the single biggest factor in providing affordable housing.

According to MGI, it is common for land costs to exceed 40% of property prices, making it a hurdle for private developers to turn them into affordable housing without suffering a loss. Speaking universally, no one can be in business unless they are able to make profit. Otherwise they just cannot exist.

Reiterating from my previous articles, our government can relief the situation by releasing public land in right locations for affordable housing developments. MGI’s report states that in Turkey, the TOKi housing agency has acquired 4,120 sq km or 4% of urban land, largely from other government entities.

TOKi in partnership with private developers then developed the land under a revenue-sharing scheme. This method allowed TOKi to split the development costs and further fund land acquisition and development of affordable homes.

The practice in China; the government will release public land to the market every year with a 70-year ground release or leasehold and also, sell development rights to the developers, in the pursue of affordable housing.

The point of illustrating countries like Turkey and China is to highlight the fact that only a government agency or authority can own or acquire land on such a big scale. Our government in the 1970s applied this method. As an example, they acquired plantation land in Shah Alam and Bangi at around RM10,000 per acre to create the townships that you see today. Today’s government could learn and continue the effort from its predecessor, in acquiring land or converting agriculture land for affordable housing purposes.

MGI’s report also emphasised that the time taken to approve the permit for housing development is another key factor to reduce developers’ capital costs. Delays in approvals affect the efficiency of the overall housing development. Our current government is well aware of this predicament; the issue now is what is its plans and actions to hasten the approval process so as to cut costs.

By releasing idle land resources and expediting the approval process, the government housing agencies such as the various state development agencies and PR1MA would be able to deliver large-scale affordable homes even without subsidies.

Efficient allocation of affordable homes is also important to avoid any abuses in the delivery of affordable housing to the wrong people, i.e. those who can afford normal housing. In South Africa, the authorities will check the national housing subsidy database to ensure applicants are first-time beneficiaries. While in Turkey, the TOKi housing agency imposes harsh penalties for fraud or abuse in the allocation of such homes.

This article started with the reason why people will not take jobs that offer wages that cannot cover their basic living cost. It is the same dilemma faced by private developers, especially the small and medium developers in our country, in the context of providing affordable homes. As such, it is important for the government to step up. It has to be determined and steadfast in making the necessary changes in order to drive home the goal of housing the rakyat.

Datuk Alan Tong has over 50 years of experience in property development. He was the world president of FIABCI International for 2005/2006 and awarded the Property Man of the Year 2010 at FIABCI Malaysia Property Award. He is also the group chairman of Bukit Kiara Properties. For feedback, please email feedback@fiabci-asiapacific.com.

Source: TheStar.com.my